It’s a well reported fact that the reason the majority of small businesses fail early on in their journey is because of poor cash flow management.
You don’t need to be a financial professional to understand the basics, but you do need to get yourself clued up fairly quickly.
To keep it simple, there are two type of cashflow:
Positive cashflow – This is when the cash entering the business exceeds the cash leaving it.
Negative cashflow – This is when the cash leaving the business exceeds the cash coming in.
A negative cashflow is not a great place to be for a business. On too many occasions, business owners think that they can survive a few months with a negative cashflow, but reality soon hits when the money is no longer in the account.
So, how can you manage your cashflow as a small business owner and ensure that your accounts constantly show a positive cashflow?
Firstly, this is something that needs to be reviewed regularly. Take time out weekly, monthly or quarterly and make it part of your business to take a deep dive into your accounts.
- How much stock do you need? This can be tricky when you first start out because you won’t necessarily know the demand but it’s important to track this information from day one, so you don’t over stock without realising.
- Do you have any outstanding invoices owed to you? This is a common theme with small business owners. Sometimes they don’t know what’s outstanding and sometimes they are afraid to ask for the balance but it’s important you do. If you are owed money, take action and get it paid.
- Do you have cash tied up in ongoing projects? If so, what are the deadlines? Knowing when that project will end will help you to plan for the future.
A few tips from us for cash flow best practice to ensure success going forward:
1 – Have a plan.
Look at the possible risks that could occur short term and long term in your business and have a plan for if it happens. There is nothing worse than hitting a brick wall and not knowing how to get yourself out of it. If you know there is a possibility of it happening, you can prepare a Plan B.
2 – Separate bank accounts
You wouldn’t believe how many start up business owners try to manage all of their finances from one bank account. DON’T DO IT!!!
From day one you need to have a separate bank account for your personal and business finances. You may think you are in control when there isn’t much coming in or going out but when the business starts to move, it won’t take long for confusion to set in. Prevention is better than the cure!
3 – Keep an eye on your stock
Make sure you are tracking your stock on a regular basis. Look for buying trends. If you keep a close eye on this, it will stop you from over buying and having cash tied up in surplus stock.
4 – Have a buffer
This could be easier said than done in the early days but having a buffer (an excess of funds available if you need it) will make sure you don’t end up in a pickle. Put a small amount of money aside every week/month and build your buffer fund. You’ll be surprised how quickly it builds and it will give you huge relief to know that there is money in the account if you need it.
5 – Focus on your cashflow, not profits
The simple fact is your accounts can show a large amount of profit, but your cash is completely tied up. Your cashflow does not come from profits but your profits do come from cashflow. If you are looking after your cashflow carefully then your profits will naturally grow. Don’t get lulled into a false sense of security that your business is in profit so the finances must be healthy, that’s simply not true.
So, what’s moral of the story?
In simple terms, make sure you keep a very close eye on your cashflow from day one. It’s likely you created a cashflow forecast, so regularly review it and ensure you are on track. If not, make changes to bring it back in line.
This isn’t an area to mess around with in business. If you do not have a healthy cashflow, you are unlikely to have a business for very long.
Take the time, it’s important and if you really can’t fit it in, invest in a good Bookkeeper. They are masters in this area.
Always here to help. All you have to do is ASBK!